About 35 seconds after Consumer Price Index data debuted yesterday at 830a ET, Dow Jones futures were up 950 points.
What is the stock market a barometer for? Inflation was 7.1% instead of 7.3%. The all-time high for blue-chip stocks was 36,952 on Jan 5, 2022. The Dow was near 35,000 before stocks opened yesterday, 5% away.
By the time trading began an hour later, it was still up over 700 points but Dow stocks briefly turned 60 points negative before closing up 100 – a thousand-point swing.
Who knows what happens today with Jay Powell speaking, or tomorrow with index futures expiring and Friday when indexes rebalance and options expire, and next week when VIX derivatives reset right before Christmas.
The WSJ reported yesterday too that the federal deficit set a November record of $250 billion, the net of tax receipts minus an all-time monthly government spending record of $500 billion.
And credit-card debt is at an all-time high, along with consumer credit of all types, the Federal Reserve reported last week. The savings rate is the second-lowest on record at 2.3% of income after spiking near 35% early in the Pandemic.
It’s not the end of the world, but rising debt and rising prices are the enemies of prosperity, not its authors.
The stock market isn’t a good barometer for what’s happening.
And boom and bust cycles aren’t found in nature. They’re byproducts of managing economic outcomes. They never happened in tribal economies. Eating and drinking and marrying and giving in marriage are perpetual events swept away only by floods of exogenous origin.
Such as floods of money.
And the stock market further obscures reality because so much of its behavior chases what happens in the next seconds. Machines behind a majority of volume aren’t concerned about earnings in the S&P 500 in Q1 2023.
The stock market is thus a barometer for temporal prices untethered from output.
It also fuels the capacity of large institutions to transfer risk. Futures surge or plunge on inflation readings because risk-transfer can occur electronically through derivatives.
Trading once the market opens becomes a race by the parties selling insurance to mitigate its effects. We see it in the very steep levels of Short Volume – which is Supply, like currency. It’s almost 49%. The entire stock market is a global-macro fund.
Falling inflation, falling oil, are a consequence of the reversal of the dollar’s Pandemic weakness. It would happen if the Fed hiked rates or didn’t. Excess dollars would be absorbed in things, and prices would stall, and fall.
Between May 2021 and Sep 2022, the dollar rose more than 20%. The Fed didn’t start hiking till Mar 2022, a proof.
A strong dollar lowers prices, especially for commodities like oil. Oil dropped from over $120 in June 2022 to $70 this month.
But since roughly Oct 1, the dollar has lost 10% of its value. Oil is starting to rise. And the decline in consumer prices could falter. It’s conceivable that we could see job-losses and economic contraction at the same time that oil and other prices rise.
Maybe even stocks. I’m not predicting it. I’m saying the fixation on the medium of exchange makes it possible, and the market reflects that barometric pressure.
There is a risk, however. Over 60% of trades are odd lots, driving average trade-size near 100 shares in the S&P 500, about the same as the regulatory minimum quote. A material part of all trades on a given day occur in tenths of pennies.
Tiny trades diffuse economic and monetary volatility, creating wide disparity. The stock market can for a long time be a barometer for money and not the economy.
But it means the alignment, at whatever point it comes, can be brutal. The air must go out of one or the other, economy or market, to reset values.
Suppose the Fed shifted from promoting credit to advancing savings? Rate-hikes are transitory, unlike inflation. It’ll cut rates the moment the economy falters.
But say you got 10% in a savings account. The economy would contract, prices would fall, jobs would be lost, borrowers would default, and the government might have to restructure. But money would buy way more. People would need less credit, less welfare.
That won’t happen.
So, we’ll continue driving a wedge between stocks and reality. The cost may be a violent event for stocks. I’m not predicting it. I’m saying the odds of it have now risen.